Tom's Blog

This question comes from Sue and is a question I hear a lot.

Q: I will be receiving an inheritance from my mother, some time this year or maybe next year. I don't really know the amount but probably aroud 100,000. My mom died in Vermont and I live in California. Will I end up paying CA taxes on the amount? if so are other states better? Her estate at death was probably around 1,000,000 but my really dysfunctional sister is the excecutor, so I don't know. Thank you. Sue D.

A: Good news, Sue. There is no income tax on an inheritance. And based on the size of your mother's estate, there shouldn't be any estate tax either. So the $100,000 (when you get it) will be free and clear from the IRS or the State.

Warmest regards,

Tom

It's been an interesting week. In fact, it's been an interesting week, month and year of self-discovery for Tom Wheelwright. And not just discovery about myself - discovery about other people and how they act and are motivated (or not). Along the way, I've learned a secret to success that I am convinced most people don't understand. I still don't completely understand it's power. I do understand its importance.

The past two years my partner and I have been building a new business. Previously, we had built a CPA (certified public accounting) firm and had been quite successful at it. Even to the point where we were able to largely step out of it and turn it over to others to run on a daily basis.

Our new business is financial education. We have learned so much over the years working with hundreds and thousands of clients that we want to share this knowledge with the rest of the world. And we both love to teach. I love to teach in a classroom and Ann loves to teach through the written word.

In order to help more people, we developed products and services that we can deliver to thousands and thousands of people, unlike the CPA professional services that we have to deliver one-to-one. To get the word out, I have been speaking on large platform stages, such as T. Harv Eker, Robert Kiyosaki, Marshall Sylver and Chris Howard. The presentation I do on these stages is designed first to teach some fundamental concepts and second to offer our products and services so we can better serve the people I'm teaching.

It's been very interesting to watch the participants in these seminars and see what they are willing to do and why they are willing to do it. Almost all of the speakers at these seminars are selling something. Usually it is some way to easily make money, such as internet marketing, real estate or some type of home-based business. People tend to buy when they are convinced that they can do it immediately and they can do it without making much effort.

All of us who have built a business and at any time in our life have been wealthy, understand that the idea of easy money is a hoax. There is no easy way to wealth. It's hard work. Some of the participants understand this. Most do not. That's why there are thousands of home study courses sitting unopened on people's shelves. And among those that are opened, only a very small portion of people make them work successfully. Why is that?

Commitment. This single word is the key to wealth and any other success we want to achieve. Commitment is the difference between the very successful and the less successful. Commitment is what keeps us from being successful at our jobs, in our families and in our athletic/physical endeavors. Commitment is the primary difference between the Olympic athlete and the weekend warrior. Commitment is what has held me back personally from the success I desire for myself, my family and my business.

We must have unwavering commitment to our cause. If our cause is our family, we must have unwavering commitment to them. If our cause is our religion, we must commit unconditionally to our religion. The Governor of South Carolina can tell you all about this. It was his lack of commitment to his family that allowed him to stray from his wife and commit adultery.

When we think of the great leaders of the world, the word commitment describes every one of them. From Mother Theresa to Martin Luther King to Ghandi. Every great leader shows total, undying commitment to their cause.

My great lesson came this week during a midnight counseling session with my older son. I woke up unable to sleep over some business matters. Max was still awake. The previous day, Max had become very angry and frustrated. So we had a little talk. As we were talking, the solution to both of our challenges became clear. We needed to be fully committed to our causes. For Max, it's a commitment to his religion and faith. For me, it's a total commitment to business, family and personal success. We both realized that it was a lack of commitment that was causing our stress.

I urge you to relieve your own stress by committing to your success. Commit to your financial success. Commit to your physical success (your health). And commit to your family's success. It's not difficult. It just takes focus and moving forward on a straight and unwavering path. Stop wondering if you are on the right path. Make a decision and get moving.

If you would like to know more about how to build wealth while reducing risk and time devoted to building wealth, visit our website at http://www.ProVisionWealth.com or join our School of Wealth Strategy at http://www.ProVisionWealth.com/products.

Thank you for reading this blog. Feel free to pass the link on to your friends. I am recommitted to writing this blog several days a week. Commit to reading it and taking action.

Warmest regards,

Tom

There is a lot of talk right now about itemized deductions. Remember itemized deductions? Those great deductions on Schedule A for taxes, interest, charitable donations and investment expenses? The big discussion right now is about President Obama's proposal to limit itemized deductions to the 28% tax bracket. That's right. If you haven't heard, under Obama's budget proposal itemized deductions would provide at most a 28% tax benefit. Even if you are in the 35% tax bracket!

What most people don't realize is that itemized deductions are already limited for high-bracket taxpayers. The reason it's not obvious is that the calculation is complex. Let me see if I can break down all of the limitations on itemized deductions for you.

First, there are the "floors." A floor is a minimum amount of deductions that you have to have before you begin receiving any benefits from the deduction. And, you only receive a benefit for the amount of deductions you have above the floor. There are two types of itemized deductions that have floors. The first is the deduction for medical expenses. This floor is equal to 7.5% of your page one adjusted gross income (AGI). So if your AGI is $100,000, then you don't get to deduct the first $7,500 of medical expenses you incur. Only those in excess of $7,500 are deductible.

The other floor applies to miscellaneous itemized deductions. These include job expenses, investment expenses and, for many people, tax return preparation and planning fees. This floor is 2% of AGI. So, in our example, with $100,000 of AGI, the first $2,000 of investment expenses is not deductible.

The second limit on itemized deductions is the Alternative Minimum Tax, or AMT. The AMT is an alternative tax calculation to the regular income tax. If your AMT tax is higher than your regular tax, you pay the AMT. Taxes and miscellaneous itemized deductions are not allowed under AMT. And the floor for medical deductions under AMT is 10% instead of 7.5%. There is also a limitation on home mortgage interest under the AMT.

The third limit on itemized deductions is a little more complex. Once your income reaches a certain level, your itemized deductions are reduced by 3% of the amount your income exceeds this level. The current level is $166,800 for most people. So, if your AGI is $20,000 more than this, your itemized deductions are reduced by $600. This is a cap on this reduction, so that nobody has their itemized deductions reduced by more than 80%.

This last limit is phasing out under current law and is scheduled to entirely phase out at the end of 2009. Perhaps President Obama's new cap will replace it or perhaps it will be in addition. We will see.

The biggest question, then, is what to do about these limits on itemized deductions. The answer is fairly simple. Do everything you can to change your deductions from itemized deductions to business deductions. Remember that business deductions are not limited. So, if you have tax planning fees, if they are for your business, they can be deducted as business expenses and not subject to all of the itemized deduction limitations. There are even some ways to shift a portion of your home mortgage and real estate taxes to your business. And with proper planning you can completely eliminate the medical expense floor so you receive a deduction for 100% of your medical expenses.

If you have any questions about how to shift your deductions from itemized to business, join us in the ProVision School of Wealth Strategy at http://www.provisionwealth.com/products or call us for a tax evaluation at 866.467.5809.

Warmest regards,

Tom

Here is a question from my good friend, Melissa, that I am sure is on the mind of many people these days. Many of you are unloading properties that are "under water" (the mortgage is higher than the value of the property) via a short sale. In a short sale, the buyer purchases the property and shorts the mortgage lender. In other words, the mortgage lender agrees to take less than the face amount of the mortgage in order to get rid of the property. There can be serious tax consequences to the seller on this transaction.

Q: If I have to do a short sale on a property, I get a 1099 from the government, which is considered forgiveness of debt. That’s taxable, but there are some ways with Obama’s recovery plans that stay that, right?

A: Actually, you will receive a 1099 from the lender. And yes, it's considered forgiveness of indebtedness. And generally, forgiveness of indebtedness is taxable income. There are some possible ways out of this.

First, if you are insolvent, you don't have to recognize the income to the extent of your insolvency. Insolvent means you have liabilities (outside of those in the short sale) that are higher than the value of all of your assets. For example, if you have debt of $600,000 and the value of all of your assets is $500,000, then you are insolvent to the extent of $100,000 and you do not have to recognize the first $100,000 of debt forgiveness income.

Second, if you are bankrupt, then you don't have to recognize the income. Both of these first two exceptions to taxation have been part of the law for many, many years.

Third, President Bush (not Obama), added a provision that allows you to avoid taxability if the short sale is on your primary residence.

There is one provision for investors to avoid income. If the discharge is of considered to be qualified real property business indebtedness, then the income may be excluded. The one other advantage an investor can get is if the loan is nonrecourse (no personal liability). In that case, the forgiveness is treated as a sale of the property and you get to recognize capital gain instead of ordinary income.

If you are in this situation, I strongly recommend you sit down with your tax coach and go over the numbers to determine whether you are insolvent and what the precise income tax consequences of the short sale will be to you.

The tax liability can be huge in a short sale, so be sure to get all of your facts straight and understand the rules before you go through with the short sale. When you do this, you can make a better decision and know the consequences of the sale before it happens.

Warmest regards,

Tom

This question came in from Chris in Hawaii:

Q: Aloha Tom: How many years should to save my tax records/receipts?

A: We recommend you keep them for 7 years. The reason for this is that the IRS has 3 years to audit you under normal circumstances and 6 years under extenuating circumstances. It's save to shred them after 7 years. Better is to maintain them in digital format. We do that for al of our clients and we can keep them as long as you want.

The Issue: The states are all short on funds with the current condition of the economy. As a result, they are aggressively going after any business that makes sales in their state and has not been collecting sales tax. One of my friends recently found this out the hard way when state revenue agents showed up at his office and began collecting data from his computers without any warning. The end result? Writing a very big check to the Department of Revenue for unpaid sales taxes.

The Rule: A business is required to collect sales tax on sales of “tangible personal property” in any state in which they have a “physical presence.” A physical presence normally means employees or an office in the state. However, many states take the position that if you visit the state to do business, especially at a trade show or speaking event, then you have physical presence and they can require you to collect and remit sales tax on all of your sales.

Tangible personal property means, for speakers, any books, cd’s, or other information products whether there is a physical product (e.g., cd) or whether it’s merely a download. This means most information products other than seminars and coaching. Even seminars can be subject to tax if they come with a manual or other materials. Some states go so far as to say that even if there is no more than a handout at the seminar, the entire course is subject to sales tax. Our member who got hit with the recent audit puts on multi-speaker events and ended up paying the tax on all of the products sold at his events over the past three years by all of his speakers.

The Solution: The best solution is simply to collect and remit tax on all sales at seminars. If this is going to cause a closing ratio challenge for you, then you can separate out the charge for the materials from the charge for the seminar or coaching services and only charge tax (or pay it yourself) on the price you charge for the materials. Just be sure the price you list on your sales form for materials is reasonable.

The Rest of the Story: This is only the tip of the iceberg. Once you have a physical presence in a state (say you speak at a seminar in that state), all of your sales to customers in that state, even through the Internet, are subject to sales tax in that state. In addition, you will be subject to income tax in that state as well. The income tax rules are much broader even than sales tax and in most states don’t require a physical presence.

So beware of this major issue as a speaker and/or promoter. 7-8% of all sales straight to your bottom line literally could put you out of business. To be safe, contact a CPA who specializes in multi-state taxes and have them do a state tax review for you. A few thousand dollars of professional fees now could save you hundreds of thousands of dollars later. For more information, feel free to contact my office at 866.467.5809 or email me at cs@provisionwealth.com

Many of you have spent thousands of dollars on seminars in the past few years. One of the more common questions I get when I am speaking at a seminar or later when I am doing a tax evaluation is whether the cost of these seminars is deductible.

Like most tax questions, the answer depends on your circumstances. Some of you own a business and the seminars are likely to improve your business skills. You are the lucky ones, as your seminar expenses should be fully deductible against your business income.

Others of you are looking to start a business. Your seminar expenses probably are not currently deductible, especially given a recent decision by the Tax Court. The Tax Court held that expenses for a real estate seminar were not deductible. Instead, they were considered start up costs of the Taxpayer's real estate business. Why? Because the Taxpayer had not begun his real estate business prior to incurring the seminar expenses.

Still others of you are trying to decide whether to start a business. If you incur seminar expenses that don't relate to your employment and you never start a business, you probably cannot deduct the cost of the seminar at all under this new Tax Court case. Certainly, this is the position the IRS is taking.

If you have questions about how to handle start up expenses, join us in our School of Tax Strategy or check out our course specifically on start up expenses at http://www.provisionwealth.com/products.

Warmest regards,

Tom

Studies show that most of us live our entire adult life based upon the things we learned and especially experienced while we were young. Whether it is our eating habits, exercise or how we relate to others, most of how we behave as adults stems from our experience and teachings as a child. That's what keeps psychologists in business. We go to them hoping they can reprogram us from the experiences of our youth.

This is especially true when it comes to money. People who grow up poor tend to be poor as adults. The same is true with people growing up wealthy, even if their parents don't pass on any of the wealth to them. If we grow up in a middle-class family, chances are we will live middle-class lives as adults. It makes sense - this is what we know.

Of course, this is not always the case. Many athletes and others grow up poor and become rich as adults. I have several clients like this. A perfect example is my friend, Marshall Sylver. Marshall grew up very poor. Now he is very wealthy. Why? Like many who grow up poor, Marshall is driven to succeed so he will never be poor again. And, of course, we hear of wealthy kids who are lazy and lose all their money. Middle class, though, is the most dangerous of these positions. It is the most difficult to rise from.

Why? Middle class is comfortable. You aren't starving or feeling a lack of basic necessities. You aren't living on grits or oatmeal. So where does the drive come from to change so you can become wealthy? Here is where you have to change your mindset. You have to begin thinking differently about what is comfortable and what is important.

The same is true about anything we want to change. We have to start by changing our mindset. Even when it comes to taxes. Most people think taxes are scary and something they have to deal with once a year and something that is a necessary evil. One of my goals in life to to teach a new mindset about taxes. They don't have to be scary. We need to deal with them throughout the year and, with proper planning, we can reduce or avoid a lot of them.

The wealthy understand this about taxes. It's one of the things that differentiates their mindset from that of the middle class. And it's an essential change of mindset for anyone who wants to move up the ladder from middle class to wealthy.

Warmest regards,

Tom

President Obama's new budget includes several changes to the tax laws. As promised, most of the benefits are for families earning under $250,000. These include the continuation of the 10% tax bracket, the child tax credit and education incentives. There is also a provision to increase the Alternative Minimum Tax (AMT) exemptions for 3 years.

The most notable change relates to the Estate Tax. As you may know, the estate tax is scheduled to go away next year and then the following year revert back to pre-Bush law (meaning that the standard exemption goes back to pre-Bush increases).

The proposal in the budget is to permanently allow a $3.5m exemption for individuals and a $7m exemption for couples. This is a relief to many of us, who were concerned that this Administration might severely reduce the exemption. This gives us some level of certainty for estate and gift planning.

If you have not done your estate plan, or would like a review of it, please contact our office at cs@provisionwealth.com or call us at 866.467.5809. We are happy to review your situation and help you determine what you can do to reduce or eliminate your estate taxes while protecting your family from probate.

Warmest regards,

Tom

Our School of Tax Strategy member, Debbie, has an overload of real estate papers and she would like to know what exact documents she will need to keep on hand and which ones she could discard or scan and save to a disc.

For tax purposes, the IRS allows records to be kept electronically, so there is no real reason to keep hard copies. There may be other laws that require you to keep hard copies of certain materials.

I suggest you keep a hard copy of your settlement statements, your mortgage note, and your deeds. And I suggest you keep them in a fireproof safe. These are the three documents on any real estate transaction that you are likely to need and to easily retrieve.

Warmest regards,

Tom